Goldman Sachs in Jail: Why is Big Money Moving Into Social Impact Bonds?

A Goldman Sachs sign is seen on at the company's post on the floor of the New York Stock Exchange, January 18, 2012.
REUTERS

Goldman Sachs Group Inc. (NYSE: GS) is investing $9.6 million in a New York City jail to reduce re-offending rates among juvenile prisoners.

The so-called "social-impact bond" investment at Rikers Island prison, the first of its kind for an American city, means any potential return for Goldman hinges on the success of a program that will educate, train and counsel inmates aged between 16 and 18.

"New York City is continually seeking innovative new ways to tackle the most entrenched problems, and helping young people who land in jail stay out of trouble when they return home is one of the most difficult -- and important -- challenges we face," Mayor Michael Bloomberg said, according to the Washington Post.

"As the first city in the nation to launch a social impact bond, we are taking our efforts to new levels and we are eager to see the outcome of this groundbreaking initiative."

By the terms of the bond, Goldman will stump up a $9.6 million loan to pay for the Adolescent Behavioral Learning Experience (ABLE) rehabilitation program.

If re-offending rates fall by 10 percent, then Goldman will receive its $9.6 million back.

And if the rate drops further, Goldman could make a profit of up to $2.1 million.

But if ABLE fails to achieve a 10 percent drop in re-offending, then the investment bank could lose up to $2.4 million.

While the money is chump change for the Wall Street titan -- which made $900 million in profit in the second quarter -- the move represents a tentative step towards greater use of social impact bonds, which have already been used extensively in the U.K.

The Goldman loan will go to the program's provider, MDRC, which in turn has been promised $7.2 million in loan guarantees by New York City Mayor Michael Bloomberg's personal foundation, Bloomberg Philanthropies, the New York Times reported.

If the program fails, MDRC can use the Bloomberg money to re-pay Goldman part of the loan. If it works, then Goldman will be paid by New York's Department of Correction.